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Is a Personal Loan Variable or Fixed Rate?


You might find it tough to figure out what type of personal loan best suits your individual needs. When shopping for one, there are a few factors that you will want to consider. Let’s look at how each one works, how they’re different, and why you might choose one over the other.

Understanding Interest Rates

When you borrow money, the interest rate is one of the most important factors to consider. Think of interest as the cost you pay for borrowing the money. The higher the interest rate is, the more expensive your loan will be.

If you’re looking to take out a personal loan, you might wonder, “Is a personal loan variable or fixed rate?” The answer is that personal loans come with both variable and fixed rates. Deciding between them can be tricky since both have pros and cons. 

Fixed-Rate Personal Loans

If you opt for a fixed-rate loan, the interest rate stays the same for the entire life of the loan. You’ll know exactly how much interest you’ll pay each month—and therefore in total—before you receive the loan funds or even begin paying the loan back. Since the interest rate never changes, your monthly payments also never change. 

Variable-Rate Personal Loans

With a variable-rate personal loan, your interest rate is not fixed for the life of the loan. While initially you might be offered a specific amount of time with a fixed rate, that will expire and then the rate can vary depending on the market. This is why it’s called a “variable” rate.  

Because your interest rate can change with this type of loan, your monthly payments will change too. This means you could end up paying a higher or lower monthly payment. Therefore you need to be financially prepared should the rate go up in any given month.

How Fixed-Rate Loans Work

Choosing a fixed-rate loan is generally a better choice if you want to minimize risk. From the beginning, you’ll know exactly how much you’ll be paying each month. You won’t take a chance on your payments rising and becoming unaffordable over time.

But the certainty that fixed-rate loans offer can come at a cost. These loans generally have higher rates than the initial starting interest rate on a variable personal loan. Therefore you’ll pay more up front for the loan you take out than you would if you opted for a variable-rate loan.

How Variable-Rate Loans Work

The advantage a variable-rate personal loan has over a fixed rate is you typically start with a lower, more competitive rate. This can be helpful if you might be struggling to make loan payments at the beginning of the loan, but expect your income to increase. 

The downside is the risk factor of variable rates. While it’s great if the rates go down, there’s also a chance they will go up. This could make borrowing much more expensive in the long run and could put you at risk of defaulting on your loan depending on just how high the rates escalate. 

Fixed-Rate Personal Loan Uses

If you plan to pay off the loan over a long period of time, it makes sense to take out a fixed-rate loan. It’s likely interest rates will rise over time but even if they do, your fixed-rate loan will not. Choosing a fixed rate ensures the security that your monthly payments are predictable and won’t change over time.

This is the best option if you can’t afford for your payments to increase. It’s worth paying more upfront to avoid situations like defaulting on a loan and sacrificing your financial stability. Because they are consistent every month, fixed-rate personal loans are the easiest to work with in terms of budgeting.

Variable-Rate Personal Loan Uses

If you only need a personal loan short term, a variable loan makes more sense. This is especially true if you plan to pay off or refinance before the rate adjusts. However, even this is risky because there’s not always a guarantee you’ll be able to pay off or refinance as you’ve planned. 

If you’re considering a variable-rate personal loan, make sure you understand how and when your payments could adjust to the market.

Even if you want to start repaying your loan immediately, ask the lender what the maximum monthly payment could be. If the maximum is too high, strongly consider passing on the variable-rate loan due to the risk of defaulting on your payments.

Your Personal Loan With OUCU Financial

Understanding variable and fixed rates is just one part of making the best financial decision for you. Consider the pros and cons of each option to choose what’s best for you now—and in the future. You can learn more about OUCU’s personal loan rates and what influences their changes below.

Average Personal Loan Rate

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